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Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 24 Taxes on Risk Taking and Wealth 23.1 Taxation.

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Presentation on theme: "Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 24 Taxes on Risk Taking and Wealth 23.1 Taxation."— Presentation transcript:

1 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 24 Taxes on Risk Taking and Wealth 23.1 Taxation and Risk Taking 23.2 Capital Gains Taxation 23.3 Transfer Taxation 23.4 Property Taxation 23.5 Conclusion

2 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 2 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Current Tax Treatment of Capital Gains 23.2 Capital Gains Taxation taxation on accrual Taxes paid each period on the return earned by an asset in that period. ---bank accounts taxation on realization Taxes paid on an asset’s return only when that asset is sold. capital gain The difference between an asset’s purchase price and its sale price.

3 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 3 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Current Tax Treatment of Capital Gains 23.2 Capital Gains Taxation “Step-Up” of Basis at Death basis The purchase price of an asset, for purposes of determining capital gains. –reset if inherited Exclusion for Capital Gains on Housing The tax code in the United States has traditionally featured an exclusion for capital gains on houses.

4 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 4 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Current Tax Treatment of Capital Gains 23.2 Capital Gains Taxation Capital Gains Tax Rates through the Years 1.From 1978 through 1986, individuals were taxed on only 40% of their capital gains on assets held for more than six months. 2.The Tax Reform Act of 1986 ended this difference and treated capital gains like other forms of income for tax purposes, with a top tax rate of 28%. 3.The Tax Reform Act of 1993 raised top tax rates on other forms of income to 39% but kept the tax rate on capital gains at 28%. 4.The Taxpayer Relief Act of 1997 reduced the top rate on long-term capital gains to 20% (though certain items, like collectibles such as art and coins, are still taxed at 28%). 5.The 2003 Jobs and Growth Act reduced the top rate further, to 15%, for gains realized after May 5, 2003 (collectibles are still taxed at 28%). Even with this long list of tax preferences for capital gains, this form of income has traditionally borne lower tax rates than other forms of income:

5 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 5 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Current Tax Treatment of Capital Gains 23.2 Capital Gains Taxation Capital Gains Tax Rates through the Years

6 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 6 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H What Are the Arguments for Tax Preferences for Capital Gains? 23.2 Capital Gains Taxation Although it may not seem fair to tax capital gains at a rate that is much lower than rates on other forms of income, three major arguments are commonly made for these lower tax rates: to protect asset owners against the effects of inflation; to improve the efficiency of capital markets; and to promote entrepreneurship. Protection against Inflation Because of inflation, current tax policy overstates the value of capital gains. For both capital gains and other forms of capital, the appropriate reaction to the inflation problem is not to lower the capital gains tax rate but to index the tax system. Improved Efficiency of Capital Transactions lock-in effect In order to minimize the present discounted value of capital gains tax payments, individuals delay selling their capital assets, locking in their assets.

7 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 7 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Encouraging Entrepreneurial Activity What Are the Arguments for Tax Preferences for Capital Gains? 23.2 Capital Gains Taxation prospective capital gains tax reduction Capital gains tax cuts that apply only to investments made from this day forward.

8 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 8 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Evidence on Taxation and Capital Gains What Are the Arguments for Tax Preferences for Capital Gains? 23.2 Capital Gains Taxation

9 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 9 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H What Are the Arguments against Tax Preferences for Capital Gains? 23.2 Capital Gains Taxation There are two arguments against the existing favoritism shown to capital gains income in most nations: 1.Capital gains taxes are very progressive. Capital gains income accrues primarily to the richest taxpayers in the United States. 2.Lower tax rates on capital gains violate the Haig-Simons principle for tax systems. The goal of taxation should be to provide a level playing field across economic choices, not to favor one choice over another, unless there is some equity or efficiency argument for doing so (such as a positive externality that justifies a tax preference). ---affecting farm land investment

10 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 10 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 23.3 Transfer Taxation transfer tax A tax levied on the transfer of assets from one individual to another. gift tax A tax levied on assets that one individual gives to another in the form of a gift. estate tax A tax levied on the assets of the deceased that are bequeathed to others. ---Only if >$3.5 million

11 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 11 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 23.3 Transfer Taxation

12 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 12 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Why Tax Wealth? Arguments for the Estate Tax 23.3 Transfer Taxation There are at least three arguments for taxing wealth:  It is an extremely progressive means of raising revenue.  It is necessary to avoid the excessive concentration of wealth and power in society in the hands of a few wealthy dynasties.  Allowing children of wealthy families to inherit all their parents ’ wealth saps them of all motivation to work hard and achieve their own success.

13 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 13 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H A “Death Tax” Is Cruel The Estate Tax Amounts to Double Taxation Arguments against the Estate Tax 23.3 Transfer Taxation There are four major arguments made against the estate tax as it is levied in the United States: It is morally inappropriate to tax individuals upon their death. You are taxed on income when you earn it and then your children are taxed on it again when you die. Administrative Difficulties To afford the tax, you may be forced to sell the asset. Compliance and Fairness Only those too unsophisticated to avoid the tax end up paying it.

14 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 14 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 23.5 Conclusion The impact of the tax code on decisions about how much to save, and in what form to save it, will always be central to debates over tax reform. Taxation doesn ’ t necessarily reduce, and under certain assumptions definitely increases, risk taking. The strongest arguments for the preferential tax treatment of capital gains are that: (a) lower capital gains tax rates will “ unlock ” productive assets, and (b) lower capital gains taxes will encourage entrepreneurship. The existing evidence on the former suggests that such unlocking is not large in the long run. The theoretical discussion suggests that the predictions for entrepreneurship are unclear. Even if lower capital gains taxation promotes risk taking and entrepreneurship, it does so at the very high cost of providing large subsidies to previous investments.

15 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 15 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Corporate Taxation 24.1 What Are Corporations and Why Do We Tax Them? 24.2 The Structure of the Corporate Tax 24.3 The Incidence of the Corporate Tax 24.4 The Consequences of the Corporate Tax for Investment 24.5 The Consequences of the Corporate Tax for Financing 24.6 Treatment of International Corporate Income 24.7 Conclusion

16 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 16 of 36 C H A P T E R 1 9 ■ T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E

17 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 17 of 36 C H A P T E R 1 9 ■ T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E To its detractors, the corporate tax is a major drag on the productivity of the corporate sector, and the reduction in the tax burden on corporations has been a boon to the economy that has led firms to increase their investment in productive assets. To its supporters, the corporate tax is a major safeguard of the overall progressivity of our tax system. By allowing the corporate tax system to erode over time, supporters of corporate taxation argue, we have enriched capitalists at the expense of other taxpayers.

18 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 18 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 18 of 24 What Are Corporations and Why Do We Tax Them? Corporations are distinct entities Corporations have special privileges -limited liability Corporate tax protects the integrity of the income tax system -avoids being a tax shelter -keeps progressivity

19 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 19 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.1 What Are Corporations and Why Do We Tax Them? Ownership vs. Control shareholders Individuals who have purchased ownership stakes in a company. agency problem A misalignment of the interests of the owners and the managers of a firm.

20 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 20 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.1 What Are Corporations and Why Do We Tax Them? APPLICATION  Executive Compensation and the Agency Problem  A number of corporate executives have made the news in recent years for receiving compensation packages that seem wildly out of proportion to the executives ’ actual value.  How can executives receive such high compensation? There are two possible reasons:  First, they may be worth it: after all, these individuals are running some of the most important companies in the world. Nonetheless, this high compensation doesn ’ t seem to be related to superior performance in many cases.  The second possible reason is that owners of firms have a hard time keeping track of the actual compensation of the firm ’ s managers, and the managers exploit this limitation to compensate themselves well. Owners of corporations try to keep control of executive mismanagement through the use of a board of directors. Continued...

21 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 21 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H board of directors A set of individuals who meet periodically to review decisions made by a firm’s management and report back to the broader set of owners on management’s performance What Are Corporations and Why Do We Tax Them? The issue of executive compensation came to a head in 2008–2009 as thousands of traders and bankers on Wall Street were awarded huge bonuses and pay even as their employers were battered by the financial crisis. Congress and the public expressed outrage at these packages and voted to limit the compensation that could be paid by firms accepting bailout funds, but compensation remains uncapped at the vast majority of financial and other firms in the United States.  APPLICATION  Executive Compensation and the Agency Problem

22 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 22 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Firm Financing 24.1 What Are Corporations and Why Do We Tax Them? debt finance The raising of funds by borrowing from lenders such as banks, or by selling bonds. bonds Promises by a corporation to make periodic interest payments, as well as ultimate repayment of principal, to the bondholders (the lenders). equity finance The raising of funds by sale of ownership shares in a firm.

23 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 23 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Firm Financing 24.1 What Are Corporations and Why Do We Tax Them? dividend The periodic payment that investors receive from the company, per share owned. capital gain The increase in the price of a share since its purchase. retained earnings Any net profits that are kept by the company rather than paid out to debt or equity holders.

24 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 24 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Why Do We Have a Corporate Tax? economic profits The difference between a firm’s revenues and its economic opportunity costs of production. accounting profits The difference between a firm’s revenues and its reported costs of production What Are Corporations and Why Do We Tax Them? Pure Profits Taxation Retained Earnings If corporations were not taxed on their earnings, then individuals who owned shares in corporations could simply avoid taxes by having the corporations never pay out their earnings. If corporations paid out those earnings many years later, the present discounted value of the tax burden would be quite low.

25 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 25 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Revenues 24.2 The Structure of the Corporate Tax The taxes of any corporation are: Taxes = ([Revenues – Expenses] × τ ) – Investment tax credit These are the revenues the firm earns by selling goods and services to the market.

26 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 26 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Expenses 24.2 The Structure of the Corporate Tax depreciation The rate at which capital investments lose their value over time. depreciation allowances The amount of money that firms can deduct from their taxes to account for capital investment depreciation.

27 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 27 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Economic Depreciation Expenses 24.2 The Structure of the Corporate Tax economic depreciation The true deterioration in the value of capital in each period of time.

28 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 28 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Depreciation in Practice Expenses 24.2 The Structure of the Corporate Tax depreciation schedules The timetable by which an asset may be depreciated. expensing investments Deducting the entire cost of the investment from taxes in the year in which the purchase was made.

29 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 29 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.2 The Structure of the Corporate Tax APPLICATION  What Is Economic Depreciation? The Case of Personal Computers  Personal computers are an excellent example of the difficulties in defining economic depreciation.  Doms et al. (2003) gathered data on the market value of personal computers and modeled it as a function of the age of the PC:  They found that the depreciation period for a PC is very rapid, on the order of only five years.  Moreover, the depreciation during this period is exponential, not linear.  The researchers also reached another important conclusion: most of the depreciation of PC value is not due to actual wear and tear on the machine but to the revaluation of the product as microprocessors improve. Economic depreciation is a subtle concept that goes far beyond physical depreciation of the actual machine. Tax policy makers face a daunting task in setting depreciation schedules appropriately across the wide variety of physical assets employed by firms in the United States. 

30 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 30 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Corporate Tax Rate 24.2 The Structure of the Corporate Tax

31 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 31 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H Investment Tax Credit 24.2 The Structure of the Corporate Tax investment tax credit (ITC) A credit that allows firms to deduct a percentage of their annual qualified investment expenditures from the taxes they owe.

32 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 32 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.4 The Consequences of the Corporate Tax for Investment Theoretical Analysis of Corporate Tax and Investment Decisions

33 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 33 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.4 The Consequences of the Corporate Tax for Investment Theoretical Analysis of Corporate Tax and Investment Decisions The Effects of a Corporate Tax on Corporate Investment

34 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 34 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.4 The Consequences of the Corporate Tax for Investment Theoretical Analysis of Corporate Tax and Investment Decisions The Effects of Depreciation Allowances and the Investment Tax Credit on Corporate Investment

35 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 35 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H APPLICATION  The Impact of the 1981 and 1986 Tax Reforms on Investment Incentives  24.4 The Consequences of the Corporate Tax for Investment  Two of the most important pieces of government legislation of the 1980s were the major tax reform acts of 1981 and 1986:  The 1981 tax act introduced a series of new incentives to spur investment by corporate America. Depreciation schedules were made much more rapid and an investment tax credit was introduced.  Contributing to the low effective tax rates in the early 1980s were active tax avoidance and/or evasion strategies by corporations.  The Tax Reform Act of 1986 made three significant changes to the corporate tax code:  First, it lowered the top tax rate on corporate income from 46% to 34%.  Second, it significantly slowed depreciation schedules and ended the ITC.  Finally, the 1986 act significantly strengthened the corporate version of the Alternative Minimum Tax (AMT). Corporate use of legal loopholes in the tax codes seems to have rebounded in the late 1990s and continues to the present day.

36 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 36 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.4 The Consequences of the Corporate Tax for Investment Evidence on Taxes and Investment There is a large literature investigating the impact of corporate taxes on corporate investment decisions. The conclusion of recent studies is that the investment decision is fairly sensitive to tax incentives, with an elasticity of investment with respect to the effective tax rate on the order of – 0.5: as taxes lower the cost of investment by 10%, there is 5% more investment. This sizeable elasticity suggests that corporate tax policy can be a powerful tool in determining investment and that the corporate tax is very far from a pure profits tax.

37 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 37 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.5 The Consequences of the Corporate Tax for Financing The Impact of Taxes on Financing

38 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 38 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.5 The Consequences of the Corporate Tax for Financing Why Not All Debt?

39 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 39 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.5 The Consequences of the Corporate Tax for Financing The Dividend Paradox Empirical evidence supports two different views about why firms pay dividends, as reviewed by Gordeon and Dietz (2006): 1. The first is an agency theory: investors are willing to live with the tax inefficiency of dividends to get the money out of the hands of managers who suffer from the agency problem. 2. The second is a signaling theory: investors have imperfect information about how well a company is doing, so the managers of the firm pay dividends to signal to investors that the company is doing well. How Should Dividends Be Taxed? An important ongoing debate in tax policy concerns the appropriate tax treatment of dividend income.

40 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 40 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H The real tax avoidance scandal centers on dividends and capital gains By Robert J. Samuelson, Sunday, April 3, 7:53 PMRobert J. Samuelson GE :$14.2 billion in WW profits, no US taxes $5.1 billion pre-tax profits US –previous losses carried forward -Tax avoidance –files taxes in 250 jurisdictions, steers profits to low tax countries Solution: lower corporate taxes, raise capita gains tax and tax dividends at ordinary income rate

41 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 41 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.6 Treatment of International Corporate Income multinational firms Firms that operate in multiple countries. subsidiaries The production arms of a corporation that are located in other nations.

42 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 42 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.6 Treatment of International Corporate Income How to Tax International Income territorial tax system A tax system in which corporations earning income abroad pay tax only to the government of the country in which the income is earned. global tax system A tax system in which corporations are taxed by their home countries on their income regardless of where it is earned. --- used by US and most OECD countries

43 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 43 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.6 Treatment of International Corporate Income How to Tax International Income foreign tax credit U.S.-based multinational corporations may claim a credit against their U.S. taxes for any tax payments made to foreign governments when funds are repatriated to the parent. Foreign Dividend Repatriation repatriation The return of income from a foreign country to a corporation’s home country. ---not taxed again

44 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 44 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.6 Treatment of International Corporate Income How to Tax International Income transfer prices The amount that one subsidiary of a corporation reimburses another subsidiary of the same corporation for goods transferred between the two. Transfer Pricing

45 Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 45 of 24 C H A P T E R 2 3 ■ T A X E S O N R I S K T A K I N G A N D W E A L T H 24.7 Conclusion Despite the declining importance of the corporate tax as a source of revenue in the United States, it remains an important determinant of the behavior of corporations in the United States. The complicated incentives and disincentives that the corporate tax creates for investment appear to be significant determinants of a firm ’ s investment decisions. And both corporate and personal capital taxation substantially, although not completely, drive a firm ’ s decisions about how to finance its investments. The United States faces a difficult set of decisions about how to reform its corporate tax system. Despite repeated calls for ending “ abusive corporate tax shelters, ” there has been little movement to end the types of corporate tax loopholes that cause such activity. This lack of interest should not be surprising: corporate tax breaks have highly concentrated and powerful supporters, with only the diffuse taxpaying public to oppose them.


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